(image: livetradingnews.com)

OPEC members will meet in Vienna on March 17, and most observers believe that they will decide to hold oil production quotas at their current levels, Reuters reported on Monday. The news service surveyed 14 financial institutions and reported unanimous consent among them that OPEC will not raise quotas at the Vienna meeting. Eight of the 14 respondents, however, predicted that quota increases are likely at some point this year.

OPEC last adjusted its quotas in December of 2008, when it responded to plummeting oil prices with a sizable 4.2 million-barrel-per-day reduction. Apparently, the action worked. Crude oil prices have been rising steadily since then and have recently stayed in the range between $70 and $80 per barrel that the Saudi oil minister in December called “perfect.” OPEC’s contentment with current prices is no secret, and is the most important factor that will keep production targets steady after the March 17 meeting, as Mike Wittner of Societe Generale explained to Reuters:

Don’t mess with success. The most important drivers for OPEC decision-making are prices and they are happy with them. So why would they want to change anything?

Although current quotas are serving members of OPEC well, it’s clear that not all members are observing them. Reuters reported that OPEC supply levels hit a 14-month high in February, and that at least four member nations were producing well beyond agreed-upon levels. With recession still gripping many nations around the world, cash-strapped governments are looking to increase oil revenue by “cheating” on OPEC targets. One such country, Nigeria, will likely push for an increase in its individual quota as waning violence in the oil-rich Niger Delta has allowed the nation to up its production in recent months.

As for the possibility of quota increases later this year, the deciding factor will be the global economic recovery. If economic conditions improve, global demand for crude oil will recover and OPEC will likely boost its output to meet that demand and help prevent the economic hindrance of spiking prices.

In short, on March 17 and for the rest of the year, OPEC will likely do whatever it takes to keep oil prices right where they are (the price of a barrel of crude stood at $81.56 a barrel as of this writing). Consumers of heating oil and other petroleum products, long accustomed to heaping blame on the cartel for rising prices, may have to get used to the idea of OPEC acting to prevent prices from going up.

However, there are still some holes in the US economic recovery, as shown by falling home sales and factory orders. As the jobs report fades from the headlines, oil traders may pay more attention to less-encouraging economic data and worry that last week’s price increases may have been overdone.

With spring approaching, heating oil demand is beginning to wane, so prices won’t find a boost there. A seasonal warming trend and recurring economic concerns should lead to lower heating oil prices this week.

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There is a flame of hope in the dark desert of Kurdish/Iraqi oil negotiations. (image: kurdistan4all via flickr.com)

In Iraq, what promised to be one of the greatest oil bonanzas of modern times is now looking less like the proverbial spouting geyser and more like a crude-based quagmire. Since 2002 more than 30 foreign companies have set up operations in oil-rich Kurdistan, a semiautonomous region in Iraq, hoping to cash in on the immense oil reserves recently discovered there.

However, according to Sunday’s New York Times, a complex political dispute between Kurdistan and Iraq, involving the scrutiny of at least one oil contract held between the Kurdish government and an outside company, still threatens to choke off oil production and send profit margins into the red, though there are some faint glimmers of hope.

The controversy first arose in November, in the wake of revelations that a former American diplomat maintained a business relationship with Norwegian oil company DNO while acting as a political adviser to the Kurds during the drafting of Iraq’s Constitution in 2005. The scandal helped to exacerbate the more contentious issue of profit sharing between Kurdish authority and the central Iraqi government, and led some officials in Baghdad to question the legitimacy of the region’s production-sharing agreements. Kurdistan contends that it has every right under Iraq’s Constitution to sign the contracts, while Baghdad maintains that they are illegal in the absence of a national hydrocarbons law, and has gone so far as to blacklist the companies operating in the region.

However, there is some promise of reconciliation, however slight. In an effort to ease some of the immediate business concerns of the heavily invested foreign oil companies now operating in the region, the Kurdish government recently presented Baghdad with a major compromise that would permit DNO, along with a Chinese-Turkish joint venture called Ttopco, to resume exports of about 100,000 barrels a day via Iraq’s pipeline network. The proposed compromise would require the two producers to offer their oil to Iraq’s State Oil Marketing Organization, which would compensate them initially just for their costs.

While the compromise is yet to be accepted by Baghdad, it could lead to at least some oil coming out of Kurdistan. With talk of peak oil and rising demand for crude in China and India, much of the industrialized world has begun to look to Iraq to provide a major boost in supplies in the near future. Whether this happens or not may depend on how and when the dispute between Kurdistan and Iraq is finally resolved.

(image: mercpartnersny.com and Nicholas Whitaker via heatingoil.com)

Oil prices continued to fall on Friday, pressured by weak demand and losses in the stock markets. Equities dropped after President Obama proposed limits on commercial banks’ trading in an effort to curb risk-taking by large financial institutions. Investors worried that this would cut profits, and their concerns have led to selling in stock and commodity markets, which has lowered crude and heating oil prices.

Today’s average retail heating oil price in the Northeast is 4 cents lower than Friday’s average price.

$80 a barrel: Where prices average or forecasts diverge. (image: hybridcars.com)

There is quite a gulf of opinion lately between oil market analysts as to which direction the price of crude will trend this year. On the one hand, there are the pragmatists, who predict that prices will average around $80 a barrel in 2010 – as it seems likely to do, given that the year started off with oil at $81 on NYMEX and soon rose to $83. On the other hand are the skeptics who see the recent surge in price as short-term and predict a return to cheaper oil in the near future.

CNN Marketwatch subscribed to the former view on Tuesday, basing their prediction on figures from the EIA that predict oil will average $79.83 per barrel in 2010, up from the previous estimate of $78.67. That translates to $2.84 per gallon for gasoline and $2.78 per gallon for heating oil. Tuesday’s news of predictions of warmer temperatures and changes to reserve restrictions by China only dropped the price to $80.63, still above the $80 threshold under debate. The EIA report states: “The world oil market should gradually tighten in 2010 and 2011, provided the global economic recovery continues as projected.”

Taking up the opposing view, Bloomberg News reported (also on Tuesday) about a finding by Deutsche Bank that oil prices above $80 will not be sustainable in 2010 and will not return in force until 2011. According to their analysts, “The oil market may encounter a period of slower demand and weaker prices in mid-2010. Rallies in the oil price above $80 a barrel will only become sustainable in 2011.”

They foresee that crude demand will increase by 1.3 million barrels a day, just shy of the 1.5 million barrels predicted by the IEA, yielding an average of $65 per barrel this year. This figure, however, is unchanged from their previous predictions in October and December of 2009, yet the price of oil has risen steadily over the course of the past few months.

Jeff Rubin, who predicted the stratospheric oil prices during the winter of 2008, is firmly in the $80-plus camp on this issue, claiming that oil is climbing inexorably back towards $100 a barrel and beyond. While Rubin believes that consumption from developing economies such as India and China will play a bigger role than political upheaval in driving price spikes, there is certainly enough political strife to around to keep prices afloat even if Rubin is wrong. Thus far this year there have been disputes between Russia and Belarus and Iran and Iraq that have oil traders on guard. Total CEO Christopher DeMargerie also sees demand driving prices higher, in conjunction with fears about finite oil supplies and new environmental restrictions that will raise production costs. While DeMargerie doesn’t hew to a specific figure, he states that crude costs will be highly volatile, ricocheting back and forth between $60 and $100.

OPEC is keeping its production values unchanged for 2010. (image: reuters.com)

At a meeting on Tuesday, the Organization of Petroleum Exporting Countries (OPEC) decided to maintain its production targets for the coming year, a sign that prices are high enough to ensure revenue but not disrupt economic recovery, according to The New York Times. Most of the nations belonging to OPEC—chief among them Saudi Arabia—appeared happy with current oil prices; but other countries expressed concern over the fact that certain OPEC members (like Nigeria) have been exceeding production targets and thereby threatening to reduce prices.

Last year OPEC cut production by 4.2 million barrels a day in order to counteract slipping demand caused by the economic downturn. The maneuver worked; oil prices that had tumbled to as low as $33 a barrel a year ago recovered to $80 this fall. Since then, prices have slid back down to $70 a barrel, in large part because Nigeria and Qatar have ramped up production in recent months while American and European demand has remained weak.

As Nigeria and Qatar have demonstrated, not every country in OPEC is sticking to the prescribed targets. OPEC’s output has been creeping up in recent months; at the moment it is 1.8 million barrels a day above the output target of 24.8 million barrels. “Compliance will continue to deteriorate, as will price,” said Lawrence J. Goldstein, a director of the Energy Policy Research Foundation. “Almost every country that can violate the quota is doing so.”

The price of oil has also been affected by recent geopolitical events. Last week, militants threatened oil supplies in Iraq and Nigeria, two of the world’s most beleaguered crude producers. Crude prices rose only 70 cents, however, to end the week at a modest $73.36 a barrel, a sign that the oil sector’s growing capacity to shrug off sudden losses in production will, at least for the moment, keep crude prices stable.

OPEC has said that while demand for oil has begun to recover, overall demand will likely remain soft through June 2010. “It is not yet clear how strong or durable the recovery might be,” OPEC said at the close of the meeting on Tuesday. If demand remains weak, OPEC will probably keep production targets low, thereby keeping prices up. However, if member-countries like Nigeria and Qatar continue to exceed production targets, heating oil customers might see prices dip.